What is the Lightning Network?

A Lightning Network is a payment protocol that is used by blockchain-based cryptocurrencies such as the popular Bitcoin. It offers quick transactions between nodes and is considered to be the solution to the infamous Bitcoin scalability problem.

When Bitcoin was first released in 2008 by Satoshi Nakamoto, critics and skeptics questioned whether Bitcoin would scale to the required size. To this day, scalability is a big issue for Bitcoin and other major cryptocurrencies.

The Lightning Network has a P2P (peer-to-peer) system that allows crypto micropayments to occur through a network of two-dimensional payment channels without assigning custody of funds and simplifying the implementation of atomic swaps.

Now explain to me like I’m five…

In simplified terms, imagine the current state of the Bitcoin network as an outdated, long-distance communication method. Let’s take a telegram, which at one point in time was the easiest and the fastest way to send a message to someone who was far away. In today’s digitalized world, the procedure would seem overwhelming and tedious: you have to go to the post office, fill out a form that includes both yours and your consignee’s details, submit it, and pay for it based on the length of your message. The message would then cross several hubs to reach its final destination before the receiver got a chance to read it. Quite a few different people needed to be involved in the procedure, and sending this simple message would be costly.

In modern times, we have speed-dialed and instant messaging, which has made long-distance communication so easy. Bitcoin’s scalability can be easily compared to this. Throughout the cryptocurrency’s existence, Bitcoin was only able to process approximately seven transactions per second. When the cryptocurrency was just released, this was fine, but as the cryptocurrency grew, this caused transactions. Bitcoin’s market capitalization currently sits at 117.81 billion USD, and at the time of writing, 1 BTC is worth $9,770.58.

You can see where seven transactions per second could cause a problem. The system becomes easily congested, making transactions both timely and costly. In comparison, Visa can process a whopping 24,000 transactions per second. Therefore, should Bitcoin ever become an alternative currency too strong fiat currencies like the USD, the speed of transaction processing will need to vastly change.

Over time, Bitcoin’s community tried to find alternative solutions to solve this issue and this where the Lightning Network was born.

How does it work?

In simple terms, the Lightning network follows the notion that not every single transaction needs to be recorded on the Bitcoin blockchain. Instead, an alternative layer is added to Bitcoin’s blockchain, which allows users to create separate payment channels between two parties on that very layer. Such channels will exist for as long as they are needed, and transactions between them will be practically instant with very low fees.

Two Bitcoin users will need to create a multi-signature e-wallet that both of them can access using their private keys. In that wallet, they can deposit a specific amount of BTC each, and then they are able to perform unlimited transactions, which are essentially rearrangements of the funds stored in their shared wallet. Both of the users can use their private keys to check their updated balances.

The distribution of funds on the channel is not actually available on the Bitcoin blockchain until the channel is closed and an algorithm distributes who gets what funds. Essentially, the Lightning Network enables BTC users to make multiple transactions outside of the main blockchain.

What are the benefits and what are the disadvantages of the Lightning Network?

The benefits are quite straightforward. The Lightning Network will improve transaction speed and transform Bitcoin into a currency that can be used on an everyday basis. Regardless of how busy the network is, transactions will be almost instantaneous. In addition to this, this will immensely reduce the cost of Bitcoin transactions. Furthermore, this will improve the cryptocurrency’s security since transactions on the network will be anonymous.

However, despite the positive response from the BTC community, there are still some negative points that users are concerned with, such as:

  • The network is not fully operational, yet which means we cannot test it. And while the concept looks great on paper, in theory, it could still face a lot of unexpected challenges.
  • Channel complexity – Conceptually, the Lightning should offer seamless transactions, but there is no way to under if a transaction will actually work without passing multiple channels.
  • Caps – Limited amount of channels will be available with the network, which will reduce its use.

Conclusion

While the Lightning Network is highly anticipated in the crypto community, it’s still very much in its infancy. BTC users cannot try it out just yet unless they are advanced users. At this stage, most of us can simply wait and let the cryptocurrency to fully come to life and see whether it lives up to its expectations then.